Market Trends January 2023
Holiday Spending Recap and Forecasts
US retail sales increased 7.6% during the period of November 1 to December 24, compared to the same time last year, according to the Mastercard Spending Pulse, released Monday. The index tracks in-store and online retail sales, excluding automotive sales, across all forms of payment and is not adjusted for inflation. According to Mastercard, consumers diversified their spending to cope with higher prices and prioritized dining out and other experiences. Restaurant sales grew more than 15% compared to the same period last year.
American shoppers also displayed a growing preference for shopping online, with online sales growing 10.6% year over year and ecommerce making up 21.6% of total retail sales, up from 20.9% in 2021.
2023 Economic Outlook
2023 will be a year of trade-offs, requiring consumers, businesses and policymakers to be flexible. Forecasts for 2023 have been changing almost as quickly as they make it into print. How everyone deals with those trade-offs will determine how the economy actually performs in 2023. Here are the latest projections and scenarios for the US economy from Wells Fargo, Goldman Sachs, the National Association of Realtors, The National Association of Home Builders, and a host of analysts.
Inflation Cools Off But Remains Too High
Although there was some cooling in November, inflation remains at the highest rate in decades despite seven successive increases in interest rates from the Fed. Now the Fed has signaled they need to raise rates further to ensure that inflation recedes back toward their target rate of 2%. However, too much tightening could backfire and push the economy into a recession.
Recession or Soft Landing? Some analysts believe a soft landing that would avoid a recession is still possible; others believe a modest recession that would begin mid-year is almost inevitable. Fannie Mae is forecasting a modest recession in 2023, with GDP dropping 0.5%, followed by a rebound to 2.2% GDP growth in 2024.
There are some signs that the forces pushing up prices are easing. Supply chains are functioning much more smoothly, delivery times have dropped, and the Producer Price Index, transportation and warehousing costs have been declining since August. However, services prices remain high and shelter inflation is unlikely to start declining until mid-year.
Wells Fargo expects core PCE inflation to slow to around a 3% annualized rate in the middle of 2023 and to about 2.5% in the fourth quarter of next year, which would be a big improvement over the current pace of 5%, although still over the 2% target.
Interest Rates to Rise and Remain High
Tough talk or painful actions? Opinions are mixed as to whether the Fed is talking tough but will do their best to avoid a recession or is resigned to the fact that achieving their long-term objective of a stable economy will inflict some short-term pain. With the job market remaining very strong and consumers continuing to spend, the Fed insists they are willing to trade higher unemployment for lower inflation and more market volatility.
It’s quite the change from early 2022, when inflation was deemed too low. Remarks accompanying the latest rate increase indicate the Fed is anticipating a top rate of 5.25%, which is higher than the target rate high of 4.75% forecast in mid-September and would point to another three-quarters of a percent increase this year. There is no longer any expectation the Fed will begin to cut rates mid-year; analysts now expect interest rates to remain high through the end of 2023 and not begin coming down until early 2024.
Housing Market Will Contract
Single-Family Housing Market Forecast from the National Realtor’s Association and NAHB:
Housing Starts Forecast: NAHB expects housing starts to fall to 0.9 million in 2023 after falling 9.6% in 2022 to 1.0 million, which had been the first decline in starts since the Great Recession in 2011. Wells Fargo expects single-family housing starts to drop nearly 10%. Starts averaged 0.8 million between 2013 and 2019.
Existing Home Sales Forecast: NAR predicts existing home sales will fall 6.8% in 2023 to 4.78 million homes after falling to 5.13 million in 2022. Fannie Mae projects just 4.0 million existing homes will be sold. The annual average between 2013 and 2019 was 5.27 million. That would make 2023 sales the lowest level since the Great Recession in 2011.
Home price appreciation zoomed double-digits during the pandemic and shortly after but rising interest rates have put monthly mortgage payments out of reach for many households. Wells Fargo forecasts that house prices will decline by about 5% on a nationwide basis this year. NAR projects a tiny 0.3% increase in 2023 to $385,800, down from a 9.6% increase in 2022 and 17.2% in 2021. Average appreciation between 2013 and 2019 was 6.4%. Some markets may see prices drop, with pricey major metros like San Francisco experiencing double-digit declines.
Mortgage Rates: The NAR projects rates will average 5.4% to 5.7% by the end of 2023 after peaking in the 7.4% range. Rates averaged 3.0% in 2021 and 4.0% between 2013 and 2019. Ultimately, the Fed’s ongoing efforts to tame inflation will slow homebuyer demand for mortgages in 2023, according to the forecast.
Mortgage origination volume is expected to decline to $2.05 trillion in 2023 from the $2.26 trillion expected in 2022, according to the Mortgage Bankers Association. The forecast calls for primary mortgage volume to drop by 3% next year, while refinance volume is anticipated to decline by 24%.
Households Face Tough Choices. With home prices and mortgage rates high, many households must decide whether to stretch their budget, lower their expectations or put off buying for now and rent. Some households will choose to stay in their current home and remodel. With remote working a possibility, some consumers may choose to relocate to less-pricey areas. The choices people make will help to determine the economic outlook in many regions of the country.
Early Retirements and Aging Baby Boomers Fuel Migration. Early retirements jumped during the pandemic and the trend is expected to continue, although the effects of slowing appreciation and a bumpy stock market may slow the pace or cause some people to postpone retirement altogether. No matter what, the large number of Baby Boomers hitting retirement age will guarantee a steady flow of retirees to retirement-friendly states, such as Florida, Arizona and New Mexico. And some states are much further down the road to recovery than others; many northern industrial states like New York, Pennsylvania, Ohio and Illinois have not recovered the jobs lost during the pandemic. State economies like Florida, Texas, Arizona and North Carolina are booming so are better able to absorb any impacts of a recession.
Unemployment to Rise
The unemployment rate is now estimated to climb to 4.6% in 2023, up from an expectation of 4.4% in September, according to forecasts.
The very tight labor market has been one of the reasons the Fed has been unable to tamp down inflation. Growth in labor costs has slowed only marginally in recent months. The Employment Cost Index rose at a 5.1% annualized pace in Q3 and average hourly earnings data shows that wages shot up at an annualized rate of 5.8% between August and November.
Businesses that struggled to find qualified workers have been reluctant to let them go, so despite rising costs and falling demand it remains an employee market. Once unemployment begins to rise employers will find it easier to hire workers without having to increase wages, which will help depress inflation. Wells Fargo forecasts that the unemployment rate will trend higher over the course of 2023 and finish the year at roughly 5%.
Construction Employment Rising
After unemployment reached 14.2% in April 2020, employment in the overall construction sector has been rising steadily and unemployment has been dropping as housing demand created by the pandemic propped up the job market. Over the last 12 months, home builders and remodelers added 105,000 jobs on a net basis. Since the low point following the Great Recession, residential construction has gained 1,204,500 positions. Residential employment currently stands at 3.2 million, higher than it was in February 2020 before the pandemic. That breaks down into 903,000 builders and 2.3 million residential specialty trade contractors.
The construction industry continues to grapple with a chronic shortage of skilled labor. Many initiatives and programs are underway to convince people in high school or in dead-end jobs that construction offers many opportunities to have a secure job and make good money.
Consumer Spending Slows
With real incomes eroding and borrowing costs rising, analysts predict consumer spending will slow down by mid-year. Households have supported spending by dipping into saving and running up credit card debt. The personal saving rate is down below 3%, the lowest rate since 2005, but consumers are still sitting on more than $1 trillion in “excess savings” accumulated during the pandemic.
Credit card debit jumped 15% in the third quarter alone, with many cards now charging interest rates of more than 20% on unpaid balances. During the holidays there were already signs of trade-offs, with shoppers whittling down the number of people on their gift list and spending more on needs and less on wants.
How quickly consumers cut their spending will have a big impact on both inflation and interest rates. If everyone in the US went on a spending diet for a quarter it would trigger a series of events that would cause the economy to cool off and inflation to finally slow down.
Wells Fargo expects a 1% decline in household spending in the second half of the year, with spending on services to rise and spending on goods to fall between 3% for nondurable goods and 7% for durable goods with a net result of a 1.0% decline in household spending in the second half of the year.
GDP Projected to Grow Slightly
The Federal Reserve lowered their US economic growth forecast for 2023 and now expects the American economy to grow 0.5% next year, down from its forecast of 1.2% growth made in September. Goldman Sachs expects GDP growth of 1.1% next year, down from its prior call for 1.5% growth from the fourth quarter of 2022 to the end of 2023.
Global Economic Downturn
Central banks in many foreign economies face the same dilemma as the Federal Reserve. That is, they too need to bring down inflation from multi-decade highs, but excessive tightening could lead to recession. Like their counterparts at the Fed, analysts expect foreign central bankers to choose inflation reduction, which will push many foreign economies into recession in 2023.
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